Book Review: Trade-Off

Trade-Off , by Kevin Maney, discuss his idea on the trade-off between high fidelity and high convenience. He defines fidelity as the total experience of something (e.g. concert).

Interesting points:

a) Fidelity vs convenience. Products/service must either position themselves as high fidelity or high convenience. Customers will always trade fidelity for convenience or convenience for fidelity (e.g. consider eating out at a further high-class restaurant or a near-by fast-food restaurant.)

b) Tech effect. Technology always improves both fidelity and convenience. In other words, if a product is of the highest convenience/fidelity today, technology will ensure that a higher convenience/fidelity will be created in future.

c) Fidelity belly. Product that is not of high/sufficient fidelity or convenience resides in the fidelity belly. An example is music CD.

d) Fidelity Mirage. Companies who choose to position their products as both high fidelity and high convenience will fail.

e) Super Fidelity / Super-convenience. This is the winning group of products that either has extreme fidelity or extreme convenience. An example is I-phone, a product with extremely high fidelity when it first comes out in the market.

f) Social dimension. The social aspects of a product will affect the fidelity of a product. For example, one is willing to pay a few dollars for a ringtone and not a few dollars for a digital song, because a ringtone performs the function of signalling your taste of music to others. A song, on the other hand, is only bought for own entertainment.

g) Wrecking-ball moments. Every now and then, there will be a very innovative product/service that drastically change the market landscape. For example, the entrance of digital camera drastically changes the camera market and marks the end of analog camera.

h) Different groups of consumers make different fidelity/convenience trade-offs. For example, techies may prefer technological advanced/cool products, while normal users will prefer easy-to-use products.

i) Starting on a small scale will allow a company to adjust its product to the tech effect, its competitors and the idelity/convenience trade-offs. Starting on a big scale may make it difficult to adjust their product positioning.

j) Finally, products that require long development time are gambles, because a better technology/product may emerge and overtake the developing product. New technologies/products always start in the fidelity belly, as companies need time to figure out how to make the technologies/products more suitable to customers' needs. The technologies/products that go out of the fidelity belly are the those that aim for either high convenience or high fidelity. Aiming at both convenience and fidelity is bad.

Investing and IQ

Success in investing doesn't correlate with I.Q. once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.

-- Warren Buffett

Lots of people have used the above statement to illustrate that intelligence does not matter in investing. Well, they are wrong, if Buffet really meant IQ above 125.

If you refer to Wikipedia, an IQ of 125 is the 95th percentile of the population. A IQ above 125 will put you the top 5% of the population! Hence, if Buffett really meant IQ above 125, success in investing would correlate with intelligence. It is just that success in investing would not correlate with high intelligence.

Either Mr Buffett has gotten the IQ score wrong, or his definition of ordinary intelligence does not mean average intelligence. Well, to each his own.

P.S. Personally, I find it strange if intelligence does not matter in investing. To some extent, intelligence will matter in investing.

Memories of My Psychology

Today, I have thought about the behavioral traps that I have fallen during the last few years, which include a stock market boom and a stock market burst.

Trap #1: Anchoring

When the market was trending downwards, I thought that the market was quite undervalued, compared to the valuations seen in the earlier stock market boom. It turns out that for some stocks, what was cheap turned to be cheaper. And for other stocks, what was cheap turned to be very expensive, as their earnings also trend downwards. I have fallen into the trap of anchoring to the valuation seen during the stock market boom.

Trap #2: Over-confidence

Similarly, while I felt uncertain about the market in late 2007, I was confident that I would not suffer large losses if the stock market tanked. Needless to say, I was proven wrong. I have fallen into the trap of over-confidence. I find myself still susceptible to over-confidence every now and then.

Trap #3: Over-enthusiastic

Every now and then, I would find myself over-enthusiastic over some new stocks that I found to be undervalued. And, I will always place an buy order for the new stock. However, after a few days, when my mind becomes calmer and start to worry about the new stock, I would invariably find unexpected faults with the new stock. I have fallen into the trap of being too enthusiastic on new stocks and letting the over-enthusiasm taking control over my normal cautiousness.

Trap #4: Once bitten, twice shy.

Once one is bitten, it is always good that one learns from the bite. However, we may over-learn and develop an unnecessary phobia. I have been bitten by China textile stocks and hence I am staying miles away from them even though these China textile stocks seem cheap. Rationally, I should try to see if I should buy some. However, I have fallen into the trap and developed a phobia for China Textile stocks. It may take me a long time to recover from this phobia.

Portfolio as at end Mar 2010

This is a post on my portfolio holdings as at end Dec 2009.

My portfolio, as at end Dec 2009, contains the following stocks:
Best World
Broadway

China Zaino
Fujian Zhenyun (FZ) Plastics

Heeton
Metro
Techcomp
UOA

Viz Branz

Sold: Fabchem, Tuan Sing, Guocoleisure,

Fabchem is sold due to its results not meeting my expectations. Tuan Sing and Guocoleisure were sold not only for cash raising purpose but also due to my impatience with their stock movements. I wonder whether their share price will prove my impatience wrong a few years later.

Partial Sold: Metro and Fujian Zhenyun.

They were also partially sold not only for cash raising purpose but also due to my impatience with their stock movements.

Bought and Sold: Saizen

Bought Saizen on the premise that it is very undervalued. However, after further reading, I find that the under-valuation may not be much. I presume that it will start giving an annualised yield of 9-10% starting July and a 9-10% yield does not provide me with sufficient margin to safety after taking into account of the exchange rate risk. Also, I dislike the princely price at which Saizen is IPOed to Singapore investors. Hence, I decide to sell Saizen very soon after buying.

Added: Techcomp

I have increased my Techcomp holdings slightly after the release of its good results.

Bought: Best World, China Ziano, Viz Branz and Heeton.

Best World was bought after the release of an better than expected results. Unfortunately, the rapid price rise prevent me from acquiring more shares.

I have bought a small portion of Viz Branz due to insider purchase and the prospect of increased earnings. Given Viz's recovered profit margin (ratio), the economic recovery may lead to increased sales and hence increased profits/earnings.

I have also bought a small portion of Heeton as a property play, after the Westcomb report that states its RNAV at $1.15. However I am wary of Heeton's high debt to equity ratio and Westcomb's high RNAV value (I did not see how Westcomb compute the RNAV). Hence, I did not purchase a large stake.

China Zaino was bought as a long-term (3-4 years) play. The stake is not large. Ziano may suffer from lower-than-expected earnings in the next 2 years, as it pays the rents and renovation of the 500 new stores. I may be able to purchase a larger stake in future at lower price, if it reports lower earnings.

Others: UOA

While UOA may be a laggard in my portfolio, I have not reduced my UOA stake. This is because UOA has earnings visibility, as it has the insight to purchase large parcels of land in KL during 2005/6 which should enable it to develop one-two properties per year at least until 2015. Furthermore, UOA has very little debt. Hence, UOA has the stability (i.e. little debt), earnings visibility and the possibility of more upside if KL property price rises. I find myself agreeing with a Channelnewsasia Forumer who has described UOA as a possible 'Wheelock' if given sufficient time.

Turnover

My portfolio turnover has been rather high this quarter, as a result of my impatience and the purchase of four new stocks. Going forward, I may continue to have high portfolio turnover, if I can find more undervalued stocks. I will need to sell existing stocks to purchase the more undervalued stocks.

As the market rise further, it will harder for me to find more undervalued stocks.

Do not blindly follow Winners' Common Traits

Recently I've been reading the book "Hard Facts, Dangerous Half-Truths & Total Nonsense". The book has pointed out an very useful but easily overlooked idea.

That is, we tend to look for common traits in Winners and think that we can be winners if we follow these common traits too. But sadly, focusing on the common Winners' traits is insufficient.

One also has to compare these Winners' traits against the Average (group). If a trait can be found in the both Average and Winner, then this trait may not be differentiating factor between Winner and Average.

In addition, even if a trait is only present in the Winners, we have only observed a correlation. For people who know statistics, correlation does not imply causation. Similarly, a trait that is only found in Winners does not necessarily mean that such a trait is important in being a Winner.

How can we apply this idea? In my previous book review on "The Greatest Trade Ever", I have noted a lot of interesting points.

Now, these points are only gathered from the book which only focus on a few winners. We do not know whether these points are found in most winners. Neither do we know whether the average will have these points.

Hence, we should not blindly accept that having these points will definitely lead/help one to become a better investor. Who knows! Some of these points may turn out hindering you from becoming a great investor.

Now, there are many books that only focus on either the winners' traits or the losers' traits. Most of these books did not compare these traits against the average (or a sufficiently large average population). And you know what this means.